Why Hedge Funds

Performance of Hedge Funds vs. Other Investments

Source: The Economist (Average return over 50 years 1944 to 1994, for US)

The performance of hedge funds as a result of their flexible and opportunistic investment style has been quite extraordinary. The median manager return for each of the hedge fund categories has exceeded the S&P 500 and the average (long only) traditional equity manager from 1989 to June 1994. The median opportunistic hedge fund manager has nearly doubled the return of the S&P 500 over this period. In viewing investment strategies in light of their risks hedge funds are quite attractive and the inclusion of hedge funds within traditional asset classes enhances portfolio diversification.

As investments in traditional asset categories offer smaller returns, drowning institutional investors are searching for something to pull them out of the water. The strong performance of hedge funds is due to the personal stake of the general partner in the fund and the freedom of the manager to operate in a variety of markets and to utilize investments and strategies with long/short exposures and degrees of leverage. Hedge funds create strong incentives for the manager to seek out the maximum return and give him the flexibility to achieve that aim.

Most hedge funds differ greatly in terms of their exposure to stocks, interest rates, currencies, commodities and other instruments worldwide. They may also differ in how they use leverage, which is a key factor in a hedge fund's risk profile. However, there are many characteristics common to most hedge funds that may be appealing to investors: Absolute versus relative returns: Hedge fund managers do not measure their performance relative to standard market benchmarks.

Their focus is on achieving absolute returns, meaning their goal is to be profitable regardless of the stock or bond market environment. Alignment of interests: In most cases, the interests of investors and managers are aligned because hedge fund managers, such as the external managers of The Champlain Fund, typically have a percentage of their investable net worth invested in their funds.

Diversification: Hedge fund strategies generally have a low correlation to traditional, long-only equity and fixed income approaches. Hedging: Many hedge fund managers use hedging techniques to potentially achieve absolute returns. Unlike traditional money managers, hedge fund managers are able to take both long and short positions in the market. This allows them to potentially profit in both rising and falling markets by having two sets of investment opportunities, in addition to helping reduce their net market exposure.

Suitability